Fortinet® (NASDAQ: FTNT), a global leader in high performance cyber security solutions, today announced financial results for the second quarter ended June 30, 2016.

"We are pleased with our billings and revenue over performance and ability to meet our expense and profitability targets while still investing for growth," said Ken Xie, founder, chairman and chief executive officer. "The threat landscape and network architectures are evolving and shifting to integrated end-to-end platforms, which is the vision Fortinet was founded upon. Our strong innovation and ability to provide a seamless, tightly-integrated and intelligent Security Fabric that protects all points in the network -- from IoT to cloud -- positions us well for continued growth and share gains in 2016 and beyond."

Financial Highlights for the Second Quarter of 2016

Revenue: Total revenue was $311.4 million for the second quarter of 2016, an increase of 30% compared to $239.8 million in the same quarter of 2015. Within total revenue, product revenue was $136.6 million, an increase of 19% compared to $114.8 million in the same quarter of 2015. Service revenue was $174.8 million, an increase of 40% compared to $125.0 million in the same quarter of 2015.

Billings1: Total billings were $373.8 million for the second quarter of 2016, an increase of 26% compared to $297.2 million in the same quarter of 2015.

Deferred Revenue: Total deferred revenue was $904.0 million as of June 30, 2016, an increase of $66.8 million compared to $837.2 million as of March 31, 2016.

Cash and Cash Flow: As of June 30, 2016, cash, cash equivalents and investments were $1.22 billion, compared to $1.19 billion as of March 31, 2016. In the second quarter of 2016, cash flow from operations was $67.9 million compared to $84.3 million in the same quarter of 2015. Free cash flow1 was $53.5 million during the second quarter of 2016 compared to $73.5 million in the same quarter of 2015.

GAAP Operating Income or Loss: GAAP operating loss was $4.0 million for the second quarter of 2016, representing a GAAP operating margin of -1%. GAAP operating income was $3.0 million for the same quarter of 2015, representing a GAAP operating margin of 1%.

Non-GAAPOperating Income1: Non-GAAP operating income was $36.0 million for the second quarter of 2016, representing a non-GAAP operating margin of 12%. Non-GAAP operating income was $29.3 million for the same quarter of 2015, representing a non-GAAP operating margin of 12%.

GAAP Net Income or Loss and Diluted Net Income or Loss Per Share: GAAP net loss was $1.4 million for the second quarter of 2016, compared to GAAP net income of $0.8 million for the same quarter of 2015. GAAP diluted net loss per share was $0.01 for the second quarter of 2016. GAAP diluted net income per share was break-even for the second quarter of 2015.

Non-GAAPNet Income and Diluted Net Income Per Share1: Non-GAAP net income was $24.0 million for the second quarter of 2016, compared to non-GAAP net income of $19.4 million for the same quarter of 2015. Non-GAAP diluted net income per share was $0.14 for the second quarter of 2016, compared to $0.11 for the same quarter of 2015.

1 A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in this press release. An explanation of these measures is also included below under the heading "Non-GAAP Financial Measures."

Conference Call Details

Fortinet will host a conference call today, July 28, 2016, at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time) to discuss its financial results. To access this call, dial (877) 303-6913 (domestic) or (224) 357-2188 (international) with conference ID # 25654626. A live webcast of the conference call and supplemental slides will be accessible from the Investor Relations page of Fortinet's website at http://investor.fortinet.com and a replay will be archived and accessible at http://investor.fortinet.com/events.cfm. A replay of this conference call can also be accessed through August 4, 2016, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID# 25654626.

Following Fortinet's financial results conference call, the Company will host an additional question-and-answer session at 3:30 p.m. Pacific Time (6:30 p.m. Eastern Time) to provide an opportunity for financial analysts and investors to ask more detailed questions. To access this call, dial (877) 303-6913 (domestic) or (224) 357-2188 (international) with conference ID # 25664452. This follow-up call will be webcast live and accessible at http://investor.fortinet.com, and a replay will be archived and available after the call at http://investor.fortinet.com/events.cfm. A replay of this conference call will also be available through August 4, 2016 by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 25664452.

Fortinet(NASDAQ: FTNT) secures the largest enterprise, service provider, and government organizations around the world. Fortinet empowers its customers with intelligent, seamless protection across the expanding attack surface and the power to take on ever-increasing performance requirements of the borderless network -- today and into the future. Only the Fortinet Security Fabric architecture can deliver security without compromise to address the most critical security challenges, whether in networked, application, cloud or mobile environments. More than 280,000 customers worldwide trust Fortinet to protect their businesses. Learn more at http://www.fortinet.com, the Fortinet Blog, or FortiGuard Labs.

Forward-looking StatementsThis press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding market adoption of cybersecurity and expectations regarding positioning for market share gains and growth potential. Although we attempt to be accurate in making forward-looking statements, it is possible that future circumstances might differ from the assumptions on which such statements are based. Important factors that could cause results to differ materially from the statements herein include the following: general economic risks; global economic conditions and foreign currency risks; increasing competitiveness in the security market; the dynamic nature of the security market; specific economic risks worldwide and in different geographies, and among
different customer segments; uncertainty regarding increased business and renewals from existing customers; uncertainties around continued success in sales growth and market share gains; longer sales cycles, particularly for larger enterprise customers; failure to convert sales pipeline into final sales; risks associated with successful implementation of multiple integrated software products and other product functionality risks; execution risks around new product development and introductions, and innovation and market acceptance of new products; litigation and disputes and the potential cost, distraction and damage to sales and reputation caused thereby; market acceptance of new products and services; the ability to attract and retain personnel; changes in strategy; risks associated with management of growth; lengthy sales and implementation cycles, particularly in larger
organizations; technological changes that make our products and services less competitive; risks associated with the adoption of, and demand for, our products and services in general and by specific customer segments; competition and pricing pressure; risks related to integrating acquisitions; and the other risk factors set forth from time to time in our most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q and our other filings with the SEC, copies of which are available free of charge at the SEC's website at www.sec.gov or upon request from our investor relations department. All forward-looking statements herein reflect our opinions only as of the date of this release, and we undertake no obligation, and
expressly disclaim any obligation, to update forward-looking statements herein in light of new information or future events.

Non-GAAP Financial MeasuresWe have provided in this release financial information that has not been prepared in accordance with Generally Accepted Accounting Principles (GAAP). These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies. We use these non-GAAP financial measures internally in analyzing our financial results and believe they are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial results with peer companies, many of which present similar non-GAAP financial
measures to investors.

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures provided in the financial statement tables below.

Billings. We define billings as revenue recognized in accordance with GAAP plus the change in deferred revenue from the beginning to the end of the period less any deferred revenue balances acquired from business combination(s) during the period. We consider billings to be a useful metric for management and investors because billings drives future revenue, which is an important indicator of the health and viability of our business. There are a number of limitations related to the use of billings instead of GAAP revenue. First, billings include amounts that have not yet been recognized as revenue. Second, we may calculate billings in a manner that is different from peer companies that report similar financial measures. Management accounts for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with GAAP revenue.

Free cash flow. We define free cash flow as net cash provided by operating activities minus capital expenditures such as purchases of property and equipment. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after the acquisition of property and equipment, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, repurchasing outstanding common stock, and strengthening the balance sheet. Analysis of free cash flow facilitates management's comparison of our operating results to those of our peer companies. A limitation of using free cash flow rather than the GAAP measure of net cash provided by operating activities as a means for evaluating liquidity is that free cash flow does not represent the total
increase or decrease in the cash, cash equivalents and investments balance for the period because it excludes cash provided by or used for other investing and financing activities. Management accounts for this limitation by providing information about our capital expenditures and other investing and financing activities on the face of the cash flow statement and under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in our most recent Quarterly Report on Form 10-Q and Annual Report on Form 10-K.

Non-GAAP operating income and operating margin. We define non-GAAP operating income as operating income or loss plus stock-based compensation, business acquisition-related charges, including inventory fair value adjustment amortization and other purchase accounting adjustments, impairment and amortization of acquired intangible assets, restructuring charges, expenses associated with the implementation of a new Enterprise Resource Planning (ERP) system, and, when applicable, any other significant non-recurring items in a given quarter. Non-GAAP operating margin is defined as non-GAAP operating income divided by GAAP revenue. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the items noted above so that our management and investors can compare our
recurring core business operating results over multiple periods. There are a number of limitations related to the use of non-GAAP operating income instead of operating income or loss calculated in accordance with GAAP. First, non-GAAP operating income excludes the items noted above. Stock-based compensation has been and will continue to be, for the foreseeable future, a significant recurring expense in our business. Second, stock-based compensation is an important part of our employees' compensation and may impact their performance. Third, the components of the costs that we exclude from our calculation of non-GAAP operating income may differ from the components that peer companies exclude when they report their non-GAAP results of operations. Management accounts for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP operating income and
evaluating non-GAAP operating income together with operating income or loss calculated in accordance with GAAP.

Non-GAAP net income and diluted net income per share. We define non-GAAP net income as net income plus the items noted above under non-GAAP operating income and operating margin, adjusted for the impact of the tax adjustment, if any required, resulting in an effective tax rate on a non-GAAP basis, which often differs from the GAAP effective tax rate. We define non-GAAP diluted net income per share as non-GAAP net income divided by the non-GAAP diluted weighted-average shares outstanding. We consider these non-GAAP financial measures to be useful metrics for management and investors for the same reasons that we use non-GAAP operating income and non-GAAP operating margin. However, in order to provide a complete picture of our recurring core business operating results, we include in non-GAAP net income and non-GAAP diluted net income per share, the tax adjustment required
resulting in an effective tax rate on a non-GAAP basis, which often differs from the GAAP tax rate. We believe the effective tax rates we used are reasonable estimates of normalized tax rates for our current and prior fiscal years under our global operating structure. The same limitations described above regarding our use of non-GAAP operating income and non-GAAP operating margin apply to our use of non-GAAP net income and non-GAAP diluted net income per share. We account for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP net income and non-GAAP diluted net income per share and evaluating non-GAAP net income and non-GAAP diluted net income per share together with net income (loss) and diluted net income per share calculated in accordance with GAAP.

FORTINET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

June 30, 2016

December 31, 2015

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

596,380

$

543,277

Short-term investments

388,388

348,074

Accounts receivable -- net

254,379

259,563

Inventory

81,247

83,868

Prepaid expenses and other current assets

33,490

35,761

Total current assets

1,353,884

1,270,543

LONG-TERM INVESTMENTS

237,223

272,959

DEFFERRED TAX ASSETS

180,782

119,216

PROPERTY AND EQUIPMENT -- net

125,636

91,067

OTHER INTANGIBLE ASSETS -- net

31,488

17,640

GOODWILL

14,235

4,692

OTHER ASSETS

16,930

14,393

TOTAL ASSETS

$

1,960,178

$

1,790,510

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Accounts payable

$

56,920

$

61,500

Accrued liabilities

32,901

33,028

Accrued payroll and compensation

70,787

61,111

Income taxes payable

8,161

8,379

Deferred revenue

563,195

514,652

Total current liabilities

731,964

678,670

DEFERRED REVENUE

340,786

276,651

INCOME TAXES LIABILITIES

66,304

60,624

OTHER LIABILITIES

16,498

19,188

Total liabilities

1,155,552

1,035,133

STOCKHOLDERS' EQUITY:

Common stock

172

171

Additional paid-in capital

744,922

687,658

Accumulated other comprehensive income (loss)

724

(933)

Retained earnings

58,808

68,481

Total stockholders' equity

804,626

755,377

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

1,960,178

$

1,790,510

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)

Three Months Ended

Six Months Ended

June 30, 2016

June 30, 2015

June 30, 2016

June 30, 2015

REVENUE:

Product

$

136,641

$

114,777

$

261,213

$

212,286

Service

174,750

125,008

334,754

240,385

Total revenue

311,391

239,785

595,967

452,671

COST OF REVENUE:

Product 1

52,788

47,397

102,101

88,765

Service 1

31,715

22,101

60,046

44,335

Total cost of revenue

84,503

69,498

162,147

133,100

GROSS PROFIT:

Product

83,853

67,380

159,112

123,521

Service

143,035

102,907

274,708

196,050

Total gross profit

226,888

170,287

433,820

319,571

OPERATING EXPENSES:

Research and development 1

45,502

37,389

90,256

73,205

Sales and marketing 1

162,694

111,928

308,797

212,537

General and administrative 1

22,184

18,018

41,623

29,979

Restructuring charges

553

-

881

-

Total operating expenses

230,933

167,335

441,557

315,721

OPERATING INCOME (LOSS)

(4,045

)

2,952

(7,737

)

3,850

INTEREST INCOME

1,705

1,364

3,451

2,786

OTHER EXPENSE -- net

(1,350

)

(830

)

(2,662

)

(1,507

)

INCOME (LOSS) BEFORE INCOME TAXES

(3,690

)

3,486

(6,948

)

5,129

PROVISION FOR (BENEFIT FROM) INCOME TAXES 2

(2,302

)

2,694

(7,678

)

2,777

NET INCOME (LOSS)

$

(1,388

)

$

792

$

730

$

2,352

Net income (loss) per share:

Basic

$

(0.01

)

$

-

$

-

$

0.01

Diluted

$

(0.01

)

$

-

$

-

$

0.01

Weighted-average shares outstanding:

Basic

172,075

169,930

171,910

169,009

Diluted

172,075

176,234

175,360

174,983

1 Includes stock-based compensation as follows:

Cost of product revenue

$

298

$

210

$

578

$

350

Cost of service revenue

2,123

1,660

4,257

3,292

Research and development

7,458

5,541

14,601

10,698

Sales and marketing

16,990

11,271

32,805

20,578

General and administrative

3,478

3,078

7,008

5,764

$

30,347

$

21,760

$

59,249

$

40,682

In March 2016, the Financial Accounting Standards Board issued Accounting Standard Update ("ASU") No. 2016-09, which allows a company to make a policy election to account for forfeitures as they occur. We early adopted this standard and elected to account for forfeitures as they occur using the modified retrospective transition method. The adoption of this standard resulted in a decrease of $2.0 million in our share-based compensation during the first quarter of 2016. The adjustment was reflected in the six-months ended June 30, 2016 condensed consolidated statement of operations.

2 The adoption of ASU 2016-09 resulted in a decrease of $3.6 million in our provision for income taxes during the first quarter of 2016. The adjustment was reflected in the six-months ended June 30, 2016 condensed consolidated statement of operations.

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

Three Months Ended

Six Months Ended

June 30, 2016

June 30, 2015

June 30, 2016

June 30, 2015

Net income (loss)

$

(1,388

)

$

792

$

730

$

2,352

Other comprehensive income (loss):

Unrealized gains (losses) on investments

662

(822

)

2,549

63

Tax provision (benefit) related to items of other comprehensive income

232

(287

)

892

23

Other comprehensive income (loss) -- net of taxes

430

(535

)

1,657

40

Comprehensive income (loss)

$

(958

)

$

257

$

2,387

$

2,392

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

Six Months Ended

June 30, 2016

June 30, 2015

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

730

$

2,352

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

21,841

13,382

Amortization of investment premiums

2,794

3,881

Stock-based compensation

59,249

40,525

Other non-cash items -- net

1,192

1,891

Changes in operating assets and liabilities:

Accounts receivable -- net

2,022

9,523

Inventory

(8,019

)

(7,917

)

Deferred tax assets

(27,120

)

(13,072

)

Prepaid expenses and other current assets

2,442

(3,492

)

Other assets

(2,409

)

(513

)

Accounts payable

(130

)

(8,383

)

Accrued liabilities

(6,426

)

(228

)

Accrued payroll and compensation

8,679

5,670

Other liabilities

(2,858

)

(1,884

)

Deferred revenue

111,082

97,156

Income taxes payable

5,463

10,033

Net cash provided by operating activities

168,532

148,924

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of investments

(230,855

)

(229,479

)

Sales of investments

7,366

22,472

Maturities of investments

219,131

240,625

Purchases of property and equipment

(44,399

)

(15,688

)

Payments made in connection with business acquisition, net of cash acquired

(20,660

)

-

Net cash provided by (used in) investing activities

(69,417

)

17,930

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of common stock

22,972

42,647

Taxes paid related to net share settlement of equity awards

(17,358

)

(11,362

)

Repurchase and retirement of common stock

(50,000

)

-

Payments of debt assumed in connection with business acquisition

(1,626

)

-

Net cash provided by (used in) financing activities

(46,012

)

31,285

NET INCREASE IN CASH AND CASH EQUIVALENTS

53,103

198,139

CASH AND CASH EQUIVALENTS -- Beginning of period

543,277

283,254

CASH AND CASH EQUIVALENTS -- End of period

$

596,380

$

481,393

Reconciliations of non-GAAP results of operations measures to the nearest comparable GAAP measures

Reconciliation of GAAP operating income or loss to Non-GAAP operating income, operating margin, net income and diluted net income per share

Three Months Ended June 30, 2016

Three Months Ended June 30, 2015

GAAP Results

Adjustments

Non-GAAP Results

GAAP Results

Adjustments

Non-GAAP Results

Operating income (loss)

$

(4,045

)

$

40,016

(a)

$

35,971

$

2,952

$

26,339

(b)

$

29,291

Operating margin

-1

%

12

%

1

%

12

%

Adjustments:

Stock-based compensation

30,347

21,760

Impairment of intangible assets

-

1,593

Amortization of acquired intangible assets

2,269

244

ERP-related expenses

6,316

1,395

Acquisition-related charges

254

1,347

Inventory fair value adjustment amortization

277

-

Restructuring charges

553

-

Tax adjustment

(14,653

)

(c)

(7,745

)

(c)

Net income (loss)

$

(1,388

)

$

25,363

$

23,975

$

792

$

18,594

$

19,386

Diluted net income (loss) per share

$

(0.01

)

$

0.14

$

-

$

0.11

Shares used in diluted net income (loss) per share calculations

172,075

176,298

176,234

176,234

(a) To exclude $30.3 million of stock-based compensation, $2.3 million of amortization of acquired intangible assets, $6.3 million of ERP-related expenses, $0.3 million of acquisition-related charges, $0.3 million of inventory fair value adjustment amortization recorded pursuant to our business acquisition and $0.6 million of restructuring charges in the three months ended June 30, 2016.

(b) To exclude $21.8 million of stock-based compensation, $1.6 million impairment of acquired intangible assets, $0.2 million of amortization of acquired intangible assets, $1.4 million of ERP-related expenses, and $1.3 million in acquisition-related charges in the three months ended June 30, 2015.

(c) Non-GAAP financial information is adjusted to achieve an overall 34% percent and 35% percent effective tax rate in the three months ended June 30, 2016 and June 30, 2015, respectively, on a non-GAAP basis, which differs from the GAAP effective tax rate.

Reconciliation of diluted weighted average shares outstanding used in the calculation of GAAP and non-GAAP earnings per share

Three Months Ended

June 30, 2016

June 30, 2015

Shares used in diluted net loss per share calculations -- GAAP

172,075

176,234

Adjustment for diluted weighted average shares outstanding

(a)

4,223

-

Shares used in diluted net income per share calculations -- Non-GAAP

176,298

176,234

(a) GAAP diluted weighted average shares outstanding differs from non-GAAP diluted weighted average shares outstanding in periods when we have a GAAP net loss and a non-GAAP net income. The adjustment for diluted weighted average shares outstanding represents the dilutive effect of employee equity incentive plan awards and is calculated by applying the treasury stock method.